ADOPTION OF THE INTERNATIONAL FINANCIAL REPORTING STANDARD BY NIGERIA – ACCOUNTING IMPLICATIONS FOR INSURANCE BUSINESS

1.     PREAMBLE

The full adoption of IFRS by Nigeria is no longer news but a reality which, must be embraced by all concerned professionals. Therefore, the topic for this retreat is very germane and apt at this crucial time when insurance companies listed on the exchange are expected to convert to IFRS in 2012 going by the road map for its
implementation. The insurance companies belong to the first category in the road-map because it is under the (SPE) listed Significant Public Entities. Those in this category have their transition date as 31 December 2010, reporting date as 31 December, 2012 and adoption year as 2012. I therefore congratulate the organizers of this programme for their well thought out topics coupled with their choices of seasoned professionals to stimulate your knowledge.

I shall give a brief run-down of the fundamental issues of IFRS as first time adopters to guide us on how to transit effectively from our local GAAP to these world-wide acceptable accounting standards.

Our local GAAP were made up of the following;

·        Statement of accounting standards issued by NASB now known as financial reporting council.

·        Stock exchange act or regulations

·        Insurance act

·        Banks and other financial institutions act, BOFIA

·        Prudential guidelines issued by CBN

After our discussions of IFRS 1, we shall then examine some issues on IFRS 4 on insurance contracts and finally consider some of the accounting implications of IFRS to help our understanding of this topic.

2.     FIRST- TIME ADOPTER OF IFRS

This applies to all organizations in Nigeria without exception. Therefore full understanding of IFRS 1 is essential and mandatory. Some of the key issues Include:

i.    Opening IFRS statement of financial position

Any organization converting is required to prepare the opening balances in conformity with IFRS standard on the date of transition. The opening financial statement to be prepared is based on two factors:

a.     The date of adoption of IFRS-2012 for insurance companies,

b.     The number of years which the organization is required to have as comparative information along with the        financial statement of the year of adoption.

ii.   Adjustment required in preparing the opening IFRS statement of financial position at adoption:

a.     Recognize all assets and liabilities required under IFRS

b.     Derecognize items as assets or liabilities if not permitted by IFRS

c.      Reclassify items of assets, liability or component of equity if differently treated by local GAAP and IFRS,

d.     Measure all recognized assets and liabilities according to principles enshrined in IFRS.

iii.  Accounting policies

A first time adopter should consistently apply the same accounting policies throughout the periods presented in its IFRS financial statements. Those policies are to be based on the latest version of the IFRS effective at the reporting date.

iv.  Targeted exemptions from other IFRS

A first-time adopter may elect to use exemption from the general measurement and restatement principles in one or more of these instances. That is, the first time adopter may elect to use any of the available options where there are alternative methods.

Examples of such exemptions are:

a.    Business combinations IFRS 3

b.    Share-based payment transactions –Equity settled transactions and cash based transactions IFRS 2 Relating to compensation of employees

c.    Insurance contracts – IFRS 4 allows entities to continue to use their existing accounting policies for liabilities arising from insurance contracts as long as it meets certain minimum requirements as set out in IFRS 4.

d.    Deemed cost – Cost surrogated for net book value or fair value. That is, cost used to replace either the net book value or the fair value.

e.    Leases IAS 17

f.       Employees benefits IAS 19 Defined contribution plan – Under this plan, the employers contribute to the scheme. But when the asset of the scheme is not sufficient to settle the liability, the employer does not have either legal or constructive obligations for the difference.

g.    Defined benefit plan – It is the direct opposite of the defined contribution plan as the             employers have legal or     constructive obligations for the difference.

h.    Cumulative transaction differences

i.        Investments in subsidiaries IFRS 10, jointly controlled entities and associates IFRS 12.

j.        Assets and liabilities of subsidiaries IFRS 10, associates and joint ventures IFRS 12.

k.     Financial instruments IFRS 7, IFRS 9, IAS 32, IAS 39 Derivatives and securities.

l.        Decommissioning liabilities included in the cost of property, plant and equipment – That is, the unsettled amount in the cost of property, plant and equipment.

m. Financial assets or intangible assets accounted for in accordance with IFRIC 12 which is on Service Concession Arrangements. IFRIC is referred to as International Financial Reporting Interpretation Committee. This is formerly known as SIC, Standard Interpretation Committee.

n.    Borrowing costs IAS 23 interest to be paid on the amount borrowed for the construction or acquisition of assets which would take time before it is used or disposed of. The option is between capitalizing the interest and expensing it.

o.    Transfers of assets from customers – Assets taken over from customers as consideration.

v.    Exceptions to retrospective application of other IFRS

These are items in the opening balances which are not allowed to be adjusted to IFRS.

IFRS 1 prohibits retrospective applications of some aspects of other IFRS relating to:

a.      De-recognition of financial assets and financial liabilities – If a first time adopter de-recognized financial assets or financial liabilities under its previous GAAP prior to the adoption of IFRS, it should not recognize those assets and liabilities under IFRS.

b.      Hedge accounting – protection of derivatives. Examples of derivatives are: instruments of shares, debentures, options, warranties etc. A first time adopter is to measure all derivatives at fair value and eliminate all deferred losses and gains on derivatives that were reported under its previous GAAP. Fair values are values not influenced by any relationship or values determined at arm’s-length.

c.       Estimates – The estimates used under previous GAAP should be consistently used when transiting to IFRS unless there is objective evidence that those estimates had been used in error. IAS 8

d.      Non – controlling interest – Previously known as minority interests. The option is between fair value basis and partial basis.

vi.   Presentation and disclosure

IFRS 1 requires full disclosures of how transition from previous GAAP to IFRS had affected the organization’s reported position, financial performance and cash flows.

·        Statement of financial position

·        Statement of income statement

·        Statement of cash flow

·        Statement of changes in equity         

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3.     INSURANCE CONTRACTS

This refers to a contractual agreement under which one party {insurer} accepts significant insurance risk from another party {the policy holder} to compensate him in case of adverse events. IFRS 4 covers most motor, travel, life, property insurance contracts and most re-insurance contracts. IFRS 4 does not apply to product warranties IAS 37, employers assets and liabilities under employee benefits plans IAS 19, contingent consideration payable or receivable in a business combination and financial guarantee contracts. All those listed matters that are outside the scope of IFRS are extensively covered by IAS 18, IAS 19, IAS 37, IFRS 2 & 3.

-          IAS 18 Revenue Recognition

-          IAS 19 Employees benefits plans

-          IAS 37 Provisions, contingent liabilities and contingent assets.

-          IFRS 2 Share based payments

-          IFRS 3 Accounting for business combination

Key issues in insurance contracts that are specified under IFRS 4 include;

1.     It prohibits the recognition of a liability for provisions for future claim under insurance contracts that are not in existence at the reporting date, e.g. catastrophe and equalization provision.

2.     It requires an assessment to be made of the adequacy of recognized insurance liabilities and the recognition of any impairment (Diminution in the value of assets) of reinsurance assets.

3.     It require an entity to keep insurance liabilities on the balance sheet until they are discharged or cancelled or expired and to ensure that insurance liabilities are presented without any offsetting against  related reinsurance assets. The gross value of the two items must be disclosed in the financial statement as there is no right of set-off.

Changes in the accounting policies

An entity is only permitted to change its accounting policies for insurance contracts if, as a result, its financial statements are more relevant or more reliable and no less relevant than previously. In particular, an entity must not introduce any of the following practices but if previously in use, they may continue to use them:

1.    Measuring insurance liabilities on an undiscounted basis – If they have been measuring insurance liabilities on an un-discounted basis, then they can continue to use it. But if not, the entity cannot introduce it.

2.    Measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services;

3.    Using non-uniform accounting policies for the insurance contracts of subsidiaries – where the subsidiary company has been using different accounting policy from that of the holding company, they can continue to use it. But where not previously in use, they cannot introduce it.

4.    Measuring insurance liabilities with excessive prudence. Where this is the previous practice, they can continue with but if otherwise, it cannot be introduced.

Other issues in IFRS 4

IFRS 4 requires an insurer to account separately for the deposit components of some insurance contracts in order to avoid the omission of assets and liabilities from the statement of financial position. An insurance contract can contain both deposit and insurance components. An example might be a profit – sharing reinsurance contract where the cedent (holder) is given a guarantee as to the minimum repayment of the premium. As with embedded derivatives, insurers need to identify any policies that may require unbundling. Generally speaking, any deposit component is subject to IAS 39 (financial instruments) and any insurance feature is subject to existing accounting policies. An entity is required or permitted to unbundle the insurance and deposit components of insurance contracts that contain both.

Bundling – Collection of deposit and insurance contracts

Un-bundling – Separating the deposit from insurance contracts

4.  ACCOUNTING IMPLICATIONS OF IFRS FOR INSURANCE BUSINESS

        i.            Cost Implication – The implementation of IFRS will involve the following overheads:

-      Cost of training and retraining of manpower resources

-      Cost of changing, modifying or improving the software packages to generate elaborate reports in line with the requirements of IFRS.

-      Associated cost of converting the opening balances in conformity with the reporting format of IFRS

-      Cost of engaging the services of technical experts including ICT consultants, professional valuers and accountants to undertake one assign mentor the other pursuant to the conversion.

-      It would lead to increased responsibility on the part of the in-house personnel and consequently there will be agitation for wage increase.

      ii.            Implication on the profitability of the business –

This may result to negative profitability sequel to elaborate provisions in the financial statements i.e. provisions for impairment due to compartmentalization of assets which is contrary to the previous general provisions. This would definitely have negative effects on the entitlements of various stakeholders most especially the investors and the employees.

    iii.            Adherence to frequent changes in IFRS –

One of the greatest challenges of IFRS is that it has witnessed some changes and modifications since introduction to make it perfect and acceptable. The frequency of changes has implications on the financial position of an entity between on period and the other. There is every tendency to treat the same issue differently as a result of changes in policy. Consequently, it may be difficult to compare the performance of an entity over some periods of time.

  iv.            Complexity of IFRS and disclosures

The financial statements prepared under IFRS may be difficult to comprehend especially by non-financial experts. This implies that they may not appreciate the efforts of management and may not understand reasons for any downward trend in profitability. It therefore requires intensive training of all major stakeholders to appreciate the significance of IFRS to the business entity.

5.     CONCLUSION

Thank you for this wonderful opportunity.

OYEDEPO FATAI OYEBADE, MBA, FCA